Tuesday, February 18, 2014

Bitcoin....WTF?

(Image courtesy of: http://www.123rf.com/photo_24569472_bitcoin-word-cloud-with-white-wordings-on-black-background.html)

I often find myself to be overwhelmed by the news some days. There is stuff going on that I have trouble grasping the concepts because it is truly just insane (Stephen Hawking’s new findings may qualify in that category,) or it is just so expansive/intertwined/systemic that it is hard to know where to begin. Bitcoin falls into the later category for me. When I first started digging into Bitcoin, I was all, “F*** this, I’m out!” Crypto currency, mining, currency exchange, networks…..let me just go ahead and not mess with this. But then Bitcoin started popping up in the news more and more, and these days it is to business news what Miley Cyrus and Justin Bieber are to entertainment news, √† la Bitcoin crashing and burning miserably. Although Bitcoin is trading at a low point lately ($273.98/BTC according to Mt. Gox, and $628.02 according to Bitstamp, as of the date of publication,) I believe we haven’t seen the end of it, nor Ms. Cyrus, or even Mr. Bieber.

So here’s the abridged version of what you need to know about Bitcoin…Bitcoin is called a crypto currency because according to Wikipedia, it “it uses cryptography to control the creation and transfer of money.” There are these nerds called miners who perform the cryptography necessary to verify and initiate the transaction between the seller and buyer. This is the beauty of Bitcoin right here, the miners act as the intermediaries of the transaction, and see to it that the bitcoins are not double-spent or counterfeit. Mining is become increasingly more complex as the number of transactions increases. Additionally, miners need to have increasingly more computer power to keep up. Miners can receive newly minted bitcoins as well as transaction fees for the work they perform. Once miners have mined 21 million bitcoins, there ends the period where new bitcoins come into the market. The miners will make money on just transaction fees at that point.  Mining is not for everyone though. Obviously, you need to be somewhat computer or IT savvy, but these days you also need ridiculously fast computers to keep up with other miners you are trying just as hard or harder than you to correctly “hash” the next block in the Bitcoin “blockchain,” which is the public ledger of all Bitcoin transactions. The transaction is public, but the identities of the buyer and seller are hidden, which made Bitcoin the choice currency for the now defunct Silk Road marketplace.  

Bitcoin is a deflationary currency, meaning only a finite amount will ever be put into play. You can buy bitcoins through a mobile device, web application or through wallet software. And soon you will be able to buy and sell bitcoins through ATMs, like, end of this month soon (for Americans that is.) You can store your Bitcoins in the cloud (hot storage) or offline on a piece of paper (cold storage.) Each bitcoin has an address that is made up of around 33 letters and numbers which is used as its primary key or unique identifier.

There are multitudes of online merchants who will take your bitcoins just as fast as those Federal Notes: WordPress, The Sacramento Kings, Overstock.com, Zoo York Snowboards, OKCupid, ETSY and others, just to name some of the big names, and the list is only growing bigger. One thing I read about was that Bitcoin is a great thing for micropayments, which are payments that are less than a dollar. Many businesses are cash-only, or they have some kind of credit card minimum purchase (which I hate so much BTW….like dude, “I just want to buy 1 beer. I don’t want to have to take 2 extra shots just to get my 1 beer cause of your stupid credit card minimum./rant) I don’t know when we will see Bitcoin as a legitimate point of sale currency option, but it will probably be here sooner than later, whether it is Bitcoin or the new hotness in cyber-currencies.

Cameron and Tyler Winklevoss, aka the Winklevii Twins from “The Social Network” are some of Bitcoins most noteworthy investors, who dumped $1.5 million into a place where you can buy and sell Bitcoins, called Bitinstant. Don’t try to go there though, I’m pretty sure the Feds shut it down less than a month ago pending an investigation into money laundering involving Bitcoin by the CEO.


Bitcoin has its fair share of problems, some of which are pretty rough. Recently, there has been trouble with withdrawals from exchange sites, much like the issues customers faced with the online poker sites years ago. There is also the problem of theft by hackers, which prompts some people to use “cold storage.” If your credit card or debit card gets stolen, most financial institutions will attempt to investigate, or at least credit you the funds you are out, but lost or stolen bitcoins are unrecoverable. Regardless of the pros and cons, Bitcoin and its copycat currencies are here to stay, at least for now.

Sources:

Saturday, February 1, 2014

I'll take one Double Irish, and better throw a Dutch sandwich in there

(Image Courtesy of http://www.crwwgroup.net/en/node/94)

If you never thought that accountants could architect great works just like Gaud√≠ or some other famous architects who I can’t possibly name, you need to think again. Today we are going to talk about a tax avoidance (not evasion) system that when you first hear it, may be somewhat complex, but I’ll do my best to dumb it down to our simpleton level. This is the infamous “Double Irish with a Dutch Sandwich (DIWDS).” Yes I know it sounds like some crazy sexual act, or something you might purchase at Starbucks, but in fact it is a strategy that has prolonged the payment of US corporate tax for many of the behemoth tech companies we know and love today. I suggest you pay attention because this is currently an issue that is being debated, guaranteed a company you love is using it, involves a lot of countries, and involves a LOT of money. After reading this, you will be able to debate your position on the issue more effectively.

Let us use my favorite “example company” from college business classes as our protagonist in this explanation. XYZ Corp, headquartered in the US, is a company who sells “widgets.” This company happens to be very successful, and thus faces a large bill from Uncle Sam on their revenues.  What they can do is set up the first of the “double Irish” companies in Ireland, sell the intellectual property to it for royalty fees and make it a tax resident of a “tax haven” by transferring central management and control to that “tax haven,” usually in Bermuda or the Cayman Islands (tax rate 0%.) They then set up a second Irish shell company as a wholly owned subsidiary of the first with tax residence in Ireland, and license the rights to that intellectual  for royalties or fees. The second Irish company who is the one that takes in the profits at the applicable competitive Irish tax corporate tax rate of 12.5%.

To take this a step further, lets add the Dutch Sandwich. So we have our US headquarters and our two Irish subsidiaries. Now XYZ corp sets up another subsidiary in the Netherlands (who have very competitive tax laws) and sends all the profits to that company. This is because “Ireland does not levy withholding tax on certain receipts from European Union member states.” Money that is needed for regular expenses is sent back to the Irish subsidiary with Irish tax residence, and the rest of the money is sent to Bermuda, by way of the other subsidiary. Because why pay Ireland’s 12.5%, when you can pay Bermuda’s 0%.

Some things to keep in mind here are that the money sent through this system is from the sales of the goods or services OUTSIDE THE US. This is not possible if the income can be shown to be booked within the United States. Also, if the company wishes to bring the cash back into the US, it must pay repatriation tax. So basically, XYZ corp is just delaying its tax bill, not really avoiding it.

The US has about a 40% corporate tax rate (35% for federal + ~5% weighted average for the different states. When you look at the rest of the world, this is dog shit, or at least not competitive. But on the contrary, we probably have greater infrastructure needs that require capital higher than other countries. So this is kind of where the debate starts; should we make companies pay more or less. Either way, companies see these tax rates too, and try their hardest to avoid them (not evasion like I said before, but avoid. The DIWDS is completely legal btw. ) A corporation’s first responsibility is to provide a positive return to their shareholders, and reducing their tax liability helps do just that.

The DIWDS is pretty much reserved for tech companies from my research. This is because tech companies’ business units can be purely intangible goods, where they can make money from intellectual property (patents, trademarks, copyrights, etc,) licensing their software, or downloads from the cloud as a few examples. A grocery store simply cannot set up a shell corporation in Bermuda, and honestly say that that shell corporation had anything to do with the sale of the goods in BFE, USA. But a tech company can…….

My research yielded little in the way of the history behind the DIWDS, but I did learn that Apple was one of the pioneers of the strategy way back in the 1980’s. And not only was Apple one of the pioneers of the strategy, they are one of the biggest defenders today of the strategy. 

Tim Cook, Apple’s CEO, has testified before Congress in favor of lowering the corporate tax rate, or giving corporations a repatriation tax holiday, where the companies who have income overseas that they want to bring back to US soil can, for a limited amount of time, pay a discounted tax rate or no tax rate at all. In fact, Apple last year took out a loan (even though they have more than enough cash to foot the bill) to pay for the dividends to the shareholders of their stock. The repatriation taxes they would have paid to Uncle Sam would have been more than the interest they would have paid on the loan. So, they basically enriched the banks, instead of the coffers of our country because it made sense financially to do that.  And that is where the debate comes from, should we have incentives for companies to look after their shareholders, or the country?


I hope this got you thinking at least a little bit. I first learned about this topic back in college when some of my peers and I were doing a competition called xTax . We BS’ed our way through a PowerPoint presentation for some PricewaterhouseCoopers partners, and we used the DIWDS as one of our contentions. It is tough to understand just the basics of the movement of money, let alone the global impact. But it is something that we will surely see again in the news, sooner than later.

Sources:

http://blogs.marketwatch.com/capitolreport/2013/05/20/apples-cook-to-press-congress-for-tax-changes-in-debut-on-the-hill/

http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx